Economic Sector

Last updated: Wednesday, February 21, 2018

Seeking Directions for Vietnam Automobile Industry

Posted: Wednesday, August 23, 2017

To find a strategic direction for Vietnamese automotive industry development, the Central Institute for Economic Management (CIEM) organised a workshop on “Developing automotive industry complexes in the world and applying lessons for Vietnam” in Hanoi.

The Challenges

Ms Nguyen Thi Tue Anh, CIEM Vice President, said the development strategy for the automobile industry with the aim of turning it into a spearhead industry of the country was launched a long time ago. Nevertheless, the automobile industry of Vietnam is still fledging mainly because of small market size and low purchasing power in the midst of lack of appropriate mechanisms and policies to encourage development.

Ms Nguyen Thi Xuan Thuy from the Industrial Policy and Strategy Institute (IPSI) under the Ministry of Industry and Trade, said the development potential of the Vietnamese automobile market is very huge as Vietnam has a big population with rising income, better infrastructure and rising demand for material enjoyment. Meanwhile, according to statistics, only 2 per cent of the population in Vietnam own the four-wheeler and the market size is very big. However, automakers have yet to find out the right course of development.

In addition, the automobile industry in Vietnam is facing numerous difficulties and challenges, especially when Vietnam has to scrap import duties on automobiles from 2018. Vehicles imported from Thailand and Indonesia are likely to outshine domestic models as their production costs are more competitive than Vietnamese vehicles. This is really a big challenge for the domestic automobile industry, said Mr Pham Anh Tuan, Director of Policy Subcommittee, the Vietnam Automobile Manufacturers Association (VAMA).

He added that the scale of the Vietnamese market is not big, the output is small and equipment depreciation is quick, resulting in higher costs of automobile production in Vietnam than other countries in the region. Furthermore, most auto parts are imported and automakers are hence subject to additional costs such as packaging, shipping and import duties. Even cars imported from Thailand that include transport costs are still cheaper than those made in Vietnam when the import tax is zero in 2018. This reality has reduced the competitiveness and threatened the existence and development of the domestic automobile industry in the context of market opening, and consumers choose vehicles from a variety of supply sources with the most competitive prices, he noted.

Learning from international experiences

Ms Tue Anh said, to accelerate the automotive industry, the domestic output must increase first as this imperceptibly pushes up the localisation ratio and supporting industries. The most important thing is maintaining a stable policy. In fact, four ASEAN countries with developed automotive industries used to adopt specific policies to support auto production. For example, Thailand lowered its special consumption tax or special excise tax from 30 per cent to 17 per cent; Indonesia brought it from 30 per cent to 10 per cent; and Malaysia imposed lower rates for higher localisation ratios. Meanwhile in Vietnam, the master plan for automobile industry and its related action plans issued are not clear and specific enough.

According to more experienced countries such as Thailand, their development policies are maintained for a long time while vehicle tax policies are changeable, particularly import duties, resulting to volatile consumer sentiment. For that reason, Vietnam should have stable and consistent tax policies on automobile development and related policies to support the sustainable market development. Besides, in the short term, it is necessary to reduce or abolish import duties on components in order to narrow the gap of production costs of domestic vehicles with imported ones and have production incentives for domestic manufacturers to maintain domestic production when the market is not large enough. In the long run, localisation support for both vehicle manufacturers and suppliers will reduce costs and increase competitiveness, said Pham Anh Tuan, Head of VAMA Policy Subcommittee.

He added that four of five ASEAN countries with developed automotive industries had specific stimulus and support policies. Malaysia, for instance, has a lower special consumption tax rate for a higher localisation ratio, while the Philippines grants US$1,000 for every vehicle made. Hence, policymakers in Vietnam should also seriously consult and learn from the experience of successful countries.

Ms Xuan Thuy recommended that Vietnam should study the experiences of countries with developed automobile industry such as Japan, China and Thailand. We need to form industrial clusters where automakers, parts suppliers, after-sales service suppliers and designers will create vertical and horizontal links. In particular, industrial clusters will formulate broader connectivity between manufacturers with policymakers and research institutions. This is a good strategic development direction for the Vietnamese automobile industry in the coming period, she concluded.